KUALA LUMPUR (Dec 10): RAM Ratings has reaffirmed Bank Islam Malaysia Bhd’s AA3/Stable/P1 financial institution ratings and the ratings of its sukuk programmes.

The rating agency said the reaffirmations are based on its view that the bank’s credit fundamentals will remain resilient, even as the effects of the pandemic wear on.

Readily available financial backing from Lembaga Tabung Haji (LTH), the bank’s largest shareholder, is another rating factor, it added in a statement.

This comes after the corporate restructuring on Oct 8, when Bank Islam assumed the listing status of its former holding company BIMB Holdings Bhd, while its previous sister company Syarikat Takaful Malaysia Keluarga Bhd was separated from Bank Islam.

Noting that LTH’s effective stake in Bank Islam declined post-restructuring to 48%, compared with 53% as at Feb 8, RAM Ratings said the bank remains a core investment of LTH and that the fund will remain committed to maintaining Bank Islam’s financial standing.

“Bank Islam has a track record of strong asset quality, having kept its gross impaired financing (GIF) ratio consistently below 1% over the years (end-June 2021: 0.7%),” wrote RAM Ratings analysts Chow Kah Mun and Wong Yin Ching.

“Catering for heightened uncertainties, the bank cranked up provisions last year,” they said, noting that its credit cost ratio rose to 39 basis points (bps) in the year ended Dec 31, 2020 or FY20  (FY19: 17 bps) and an annualised 16 bps in the first half of FY21, boosting GIF coverage to 235% as at end-June 2021 (end-December 2019: 174%). 

“Healthy pre-provision earnings and sturdy capitalisation (common equity tier-1 capital ratio: 13.8%) also afford the bank ample buffers for loss absorption,” said Chow and Wong.

Meanwhile, RAM Ratings said the Islamic bank’s proportion of financing under assistance measures at 36% at end-July 2021, which were considerably higher than most banks, should not alarm investors as roughly 98% of its financing under relief had zero months in arrears. 

“As the bulk of the bank’s retail financing is extended to civil servants with relatively stable employment, the high take-up could indicate that applicants opted for the recent Pemulih financing moratorium as a precaution. At point of application, roughly 98% of financing under relief was zero months in arrears.

“While impairments might begin to crystallise when assistance programmes gradually unwind, Bank Islam’s large portion (over 60%) of retail financing that is repaid through non-discretionary salary deductions or salary transfers will help contain credit risk to some extent,” the agency said.

RAM Ratings said Bank Islam’s three-year average net financing margin of 2.5% is among the widest in the industry, and had continued to support its overall performance, buoyed by high shares of lucrative personal financing (about 30%), and current and savings account (39% of total customer funding).

“Loftier credit costs and a RM136.4 million modification charge crimped the bank’s 2020 pre-tax profit, which fell 14% to RM728.2 million. Return on risk-weighted assets was a lower 1.8% as a consequence (fiscal 2019: 2.2%). Some earnings headwinds could persist as provisions and modification charges stay elevated, albeit lower than last year’s,” the rating agency said.

RAM Ratings concluded that the Islamic bank’s earnings could face some headwinds, as provisions and modification charges remain elevated despite being lower than 2020.

Shares of Bank Islam closed 10 sen or 3.45% lower at RM2.80 on Friday (Dec 10), giving the bank a market capitalisation of RM5.81 billion.